If your IRA is currently in stocks, Mutual Funds or any other types of investments, and you are concerned about the risk to your principal due to market fluctuation, a Fixed Indexed Annuity might be an excellent way to guarantee your principal with an opportunity for greater growth with no downside risk.
A fixed indexed annuity, also known as equity indexed annuity or FIAs is a fixed annuity that offers a minimum guaranteed interest rate and potential for higher earnings than traditional fixed annuities based on the performance of one or more stock market indexes.
The name “equity indexed” annuities refers to a class of fixed annuities that credits interest based on a formula that considers changes in an equity index. Some of the most common indices are the Standard and Poor’s 500® Composite Price Index (commonly called “the S&P 500®”), Dow Jones, Russell 2000, Nasdaq and so on.
When purchased with retirement plan funds such as IRAs, SEP IRAs, Defined Benefit Plans, Profit Sharing, Money Purchase Plan, SIMPLE IRAs, earnings grow tax-deferred. Many investments are taxed year by year, but the investment earnings, capital gains and investment income in annuities aren't taxable until you withdraw the money. In many cases, IRAs, SEP IRAs, Defined Benefit Plans, Profit Sharing, Money Purchase Plan, SIMPLE IRAs can be set up inside the FIAs and also can be transferred or rolled over into any qualifed IRA annuity.
A single-premium FIA is a one-time investment whereas a flexible-premium FIA allows for subsequent investments after your initial investment. With both types, you need to allocate your premium, or investment, between a fixed account and one or more indexing strategies. The fixed account pays a fixed rate of return for one or more years that's generally higher than a similar-duration CD.
Indexing strategies provide the opportunity to earn interest based on the performance of a defined stock market index each contract year, with the Standard & Poor’s 500 Index being the most prevalent offering. Unlike a direct investment in an index where you participate in gains as well as losses, there are two basic differences when you allocate funds to an indexing strategy within an FIA:
While the index annuity concept offers many features of a traditional fixed annuity, it has a rather unique feature that allows a potential of stock market-linked interest credits without the potential of any market-type loss. In contrast to a securities-type product or mutual fund where the investor bears the market risk, the fixed index annuity concept insulates the contract owner from any risk of loss of principal due to market downturns.
In other words, unlike bond and equity investments, if you have a traditional fixed indexed annuity with capped strategies, you won't participate in losses, but won't fully participate in gains to the extent that the performance of a particular indexing strategy exceeds that of a defined cap if it's the case of traditional fixed indexed annuity.